Oahu industrial space more plentiful, but not to rent

Honolulu's industrial vacancy rate jumped to 3.0 percent in 2007, its highest annual rate in five years, as new warehouse condominiums flood the market, according to a new report.

The trend is expected to continue as additional industrial projects become available for sale throughout the year and relieve some of the demand among businesses seeking industrial space, according to the 2007 industrial market report released yesterday by Colliers Monroe Friedlander Inc.

But despite the increase in industrial condominium projects -- with more than 400,000 square feet scheduled to open this year -- leasing opportunities have remained scarce for tenants looking to expand or relocate.

"Very little new speculative construction of 'for lease' warehouse space will be built," the report said. "As long as high land prices and rising construction costs prohibit financial viability, warehouse construction will be limited to owner-user developments and industrial condominiums."

This has resulted in a jump in the weighted average base monthly rent from $1.10 per square foot to an unprecedented $1.31 per square foot on Oahu during the past year. Rents have nearly doubled since 2001 and are expected to increase at a slower pace this year.

"This marks the sixth consecutive annual rental rate increase since the economic downturn experienced in 2001 and reflects a jump of nearly 90 percent during this time period," the report said.

During 2007, vacancy rates ranged between 1.92 percent in the first quarter to 3.38 percent in the third quarter, primarily due to the closure of Kilgo's on Sand Island, Target leasing the former Costco site at Bougainville and the Kapolei Spectrum industrial condominium.

Over the longer term, Colliers expects an increase in ground rent re-negotiations for leasehold industrial properties, a situation that has the potential to cause more bankruptcies and the closure of businesses in upcoming years.

Oahu's industrial warehouse market is facing the expiration of a number of ground leases from Halawa to downtown Honolulu, signaling a potential spike in rates.

These re-negotiated rents are expected to double and even quadruple over existing rates that were determined more than a decade ago, according to the report.

"Higher ground rents cause additional financial constraints on businesses forcing them to relocate to lower cost industrial markets outside of urban Honolulu, or even worse, to close their businesses."